Earnings Call
Fortuna Mining Corp. (FSM)
Earnings Call Transcript - FSM Q3 2021
Operator, Operator
Good day ladies and gentlemen, and welcome to the Fortuna Silver Mines, Third Quarter Financial and Operational Results Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Carlos Baca, Director of Investor Relations. Sir, the floor is yours.
Carlos Baca, Director of Investor Relations
Thank you, Cate. Good morning, ladies and gentlemen, I would like to welcome you to Fortuna Silver Mines and to our financial and operations results call for the Third Quarter of 2021. Hosting the call today on behalf of Fortuna will be Jorge Alberto Ganoza, President and Chief Executive Officer; Luis Dario Ganoza, Chief Financial Officer; Cesar Velasco, Chief Operating Officer, Latin America; and Paul Criddle, Chief Operating Officer, West Africa. Today's earnings call presentation is available on the featured presentation box on our homepage at fortunasilver.com. As a reminder, statements made during this call are subject to the reader advisories included in yesterday's news release and in the Earnings Call Presentation. Financial figures contained in the presentation and discussed in today's call are presented in U.S. dollars, unless otherwise stated. Before I turn over the call to Jorge, I would like to indicate that this earnings call contains forward-looking information that is based on the Company's current expectations, estimates, and beliefs. This forward-looking information is subject to a number of risks, uncertainties, and other factors. Actual results could differ materially from a conclusion, forecast, or projection in the forward-looking information. Certain material factors or assumptions were applied in drawing our conclusion or making a forecast or projection as reflected in the forward-looking information. Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and the material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information is contained in the Company's annual information form and MD&A which are publicly available. The Company assumes no obligation to update such forward-looking information in the future, except as required by law. I would now like to turn the call over to Jorge Alberto Ganoza, Co-Founder of Fortuna.
Jorge Alberto Ganoza, President and CEO
Thank you, Carlos. In the quarter, we delivered record sales of $153 million, adjusted net income of $22.5 million, EBITDA of $75 million with a strong consolidated EBITDA margin of 46%. These solid financial performances are on the backlog of record gold production driven by the Lindero Mine. And this being the first quarter where we incorporated results from our West Africa business. As of the end of the quarter, we have liquidity available of $136 million and run the business with a conservative debt to EBITDA ratio of 0.2. Also during the quarter, we announced the start of construction of our Seguela mine in Côte d'Ivoire. We plan for Seguela to start production and continue driving growth for the Company by mid-2023. We concluded successfully our 100-day integration plan with Roxgold. The integration of our combined business has been a smooth process and the main reason, of course, is the quality of people and shared values. We always said that in combining our business, we were not only acquiring quality assets, but a team of seasoned professionals with whom we share a similar view of how to create value in the business. After the end of the quarter on November 5th, we renewed our credit facility and expanded it to $200 million. Out of this amount, $120 million is currently available with the full amount to become available upon the San Jose permit issue being resolved. In the quarter, we also managed to successfully settle, for $9.6 million, the disputed royalty claim with the Geological Survey and Secretary of Economics of Mexico on one of our main concessions at the San Jose mine. This has been a protracted complex negotiation where we achieved an arrangement to the satisfaction of the Company and the sale authorities. Now, what has hindered a good quarter is this new issue where the Mexican Ministry of Environment, SEMARNAT has on November 10, denied our request for a 10-year extension of the environmental permit of the San Jose mine. This renewal process is something we started in May of this year. SEMARNAT cited two main reasons for the denial: first, not receiving requested information from us, and second, that we have an open evaluation for the regularization of 73 ancillary facilities not declared in the 2009 environmental impact statement. With respect to the first point, we have already provided proof that they've been back to 2019 we have been submitting and complied with the said information. And second, we are of the strong view that the regularization of ancillary infrastructure, which is a process that we initiated in 2019 and is currently in the hands of SEMARNAT and evaluates the mitigation of impacts for a greenhouse, a soccer field, a weather station, a porch, and drill core storage facility, an office, a 40,000-litre fuel truck, a power transformer, and other infrastructure of similar nature cannot provide grounds for a denial. Additionally, our legal team is also of the strong view that the regularization of 73 works does not form part of the request for the extension. The deadline for SEMARNAT to provide a response to our 10-year extension application expired on Saturday, October 23rd. This was informed in a press release dated October 25th. Before the October 23rd date and as a precautionary measure, the Company initiated legal actions in Mexican courts and obtained preliminary protection to continue operations considering a potential delay in obtaining the extension for our questionable denial or San Jose mine is currently operating under the protection of these court actions, and we seek to strengthen this protection from the courts with the recent notification received from SEMARNAT. Our legal team is evaluating and working on this. Our agreement on our senior bank facility requires that we obtain a permanent injunction or similar protection before November 20th. We have engaged with our lenders to provide for the flexibility and time that this circumstance requires. Additionally, we have not exhausted the avenue of dialogue with SEMARNAT and Mexican authorities. We have the right to and will file an appeal to this negative resolution and have scheduled meetings with high-ranking SEMARNAT officials to try to resolve this unfortunate situation. SEMARNAT has also informed that they favor a consultation procedure on the environmental impact assessment under evaluation covering the 73 ancillary facilities. The Company is not opposed to any consultation procedure that adheres to the mechanisms provided in the environmental impact assessment, which are very clear and supported by jurisprudence in Mexico. Mexico is a country with a long and proud mining tradition and we view this position from SEMARNAT as unprecedented. We're pursuing all avenues available to solve this as soon as we can. Under ESG, our prioritized KPIs show improvement for greenhouse gas emissions, water, and energy efficiency over the last year compared to the same quarter last year. Our figures are benefiting from the inclusion of measurements from our Lindero mine starting this year. We reported two lost-time accidents of minor consequence in the quarter, one at the San Jose mine and one at the Lindero Mine. Our figures for women in the labor force were impacted by the migration from a contractor-operated underground mine at San Jose to owner-operated where we incorporated approximately 265 workers to our payroll. At our Caylloma Mine in Peru, we successfully closed a 6-year agreement with the community of Caylloma, which provides a solid framework for the relationship with all relevant stakeholders in our area of influence for the coming years. With respect to production compared to last year's quarter, our gold production has expanded by 400% to 65,500 ounces. Our largest contributor for gold was the Yaramoko Mine in Burkina Faso with 28,750 ounces, followed by Lindero with 26,000 ounces of gold. Of note is our Caylloma Mines, which since last year has been contributing small but consistent gold, estimated to be around 5,000 ounces a year. A small amount perhaps in the bigger picture, but a welcome and meaningful contribution to the economy of that mine. Silver production from our San Jose and Caylloma Mines stood at 1.7 million ounces in the quarter. The shortfall with respect to the comparable quarter is explained by lower silver production at San Jose impacted by downtimes as the mine transitioned from contractor to owner operations at the underground mine and the lower grades compared to the Q3 of last year. Precious metals accounted for 88% of $462 million in sales, silver accounted for 22% of sales. Our costs tracked in line with our guidance range for the year at all our operations. San Jose exceeded its cost inflation against the comparable quarter, driven by lower silver and gold production stemming from lower grades and slightly higher OpEx of about 7%. I will now have Cesar Velasco, our Chief Operating Officer for LATAM, and Paul Criddle, our Chief Operating Officer for West Africa, provide some highlights from their respective regions. So Cesar, you want to go ahead?
Cesar Velasco, Chief Operating Officer, LATAM
Thank you, Jorge. Yes, our three mines in Latin America are performing in line with management's expectations and are on track to meet annual guidance. COVID-19 related restrictions in the three countries where we operate have been considerably eased and double-dose vaccination rates at all operations are now well above 80%. The Lindero Mine is operating within design parameters and delivered record gold production of 26,235 ounces in the third quarter. It is important to highlight the solid performance of the operation, good mechanical availability, and the increased gold production trend. A syndicated mine is on track to meet annual guidance and management looks forward to an even stronger performance in the fourth quarter. Back to you, Jorge.
Jorge Alberto Ganoza, President and CEO
Thank you. Paul, you want to go ahead?
Paul Criddle, Chief Operating Officer, West Africa
Thank you, Jorge. Operations in West Africa are progressing well against our plan. The COVID impact in Côte d'Ivoire has now been mitigated, with little or no impact on operations today, as 90% of employees are vaccinated. Production is in line with the plan for Q3 and similarly remains the case for the year. I would like to highlight the excellent progress made by the team on the ground at our Seguela project in Côte d'Ivoire. During the third quarter, this was highlighted by the Board’s approval of the construction decision for the project. As per the project execution plans, both the schedule and the costs remain on track with approximately 50% of the project completed. This has allowed us to advance in both the third and now fourth quarters, executing and commencing the process planning agreement. We have committed the plants on contract. We executed the substation supply contract. We continued to expedite the critical parts of mechanical items such as segments crushed in transformers. In conjunction with the works on gathering in the field, we are establishing a footprint of capabilities in-ground with the establishment of the West African regional office in Abidjan, which will support the Seguela development effort now and ultimately uphold the operational needs of Seguela and Yaramoko. In addition, dialogue is ongoing with the mines and budget ministry in Côte d'Ivoire, with sessions planned in the coming weeks to advance the conclusion of the project's planning convention. Thank you, Jorge.
Jorge Alberto Ganoza, President and CEO
Thank you, Paul Criddle. Now, Carlos, I return it back to you.
Carlos Baca, Director of Investor Relations
We would now like to turn the call over to any questions you may have.
Operator, Operator
Thank you. Ladies and gentlemen, the floor is now open for questions. Please hold a moment while we poll for questions. Our first question today is coming from Dalton Baretto at Canaccord. Your line is live. You may begin.
Dalton Baretto, Analyst
Yes. Thank you. Jorge, I'd like to start by saying I'm truly sorry that you continue to face these challenges in Mexico. These things happen in certain parts of the world, and no doubt you will get this resolved, but it’s going to take some time. So that said, this temporary injunction that you face, when does it expire? And what do you need to do to make it more permanent?
Jorge Alberto Ganoza, President and CEO
Yes. We have different legal actions in place, and also workers have initiated actions in local courts. So right now, we are of the view that these legal actions now that there is a negative resolution can be moved to a more permanent injunction because part of the issue for the granting or the limitation for the granting of a permanent injunction was that we did not know what were the grounds for the delay in SEMARNAT’s reply to us or what they were arguing. Now that we have their arguments, as I explained them in the call, we are going back to the court and based on what’s being presented, which doesn't make any sense to us and our legal counsel, we're seeking a more permanent injunction. That’s a process that can take several days. The preliminary measures that we have currently are preliminary in nature and I would be speculative to say exactly what type of coverage we get but it's measured in probability.
Dalton Baretto, Analyst
Okay. As a follow-up, if you are unable to achieve a permanent injunction by November 20th, what is the current penalty from your lenders? Additionally, if you cannot secure this injunction and are forced to shut down San Jose, how flexible do you think your lenders will be?
Jorge Alberto Ganoza, President and CEO
Luis, you're speaking with the lenders. Do you want to come in?
Luis Dario Ganoza, Chief Financial Officer
Yes. Sure. Well in principle, the straight answer is that non-compliance would trigger an event of default under the credit agreement. It is our expectation however, that we will work with our lenders to provide us whether flexibility is appropriate and warranted given the evolving circumstances. And we're still optimistic that our legal actions have a strong likelihood of progressing, and we believe that the lenders will be working with us to, again, provide that flexibility required to avoid any unnecessary situation with respect to the status of our credit agreement and our covenant.
Dalton Baretto, Analyst
Okay. Thank you. I have more questions, but I'll jump back in the queue. That's it from me for now.
Operator, Operator
Thank you. Our next question today is coming from Justin Stevens at PI Financial. Your line is live, you may begin.
Justin Stevens, Analyst
Thanks. I have a couple of questions. It’s great to see the conveyor stocking ramping up in Q3 at Lindero. I would like to know how the leach times are aligning with the model.
Jorge Alberto Ganoza, President and CEO
Yes. Cesar, you want to provide an answer there?
Cesar Velasco, Chief Operating Officer, LATAM
Yes, okay. The reconciliation is looking pretty good. It demonstrates a good relationship with the reserve. Actually for Q3, we had less than 6% difference in the reconciliation and as of year-to-date it is even less than 3%. So it's looking pretty good and consistent.
Jorge Alberto Ganoza, President and CEO
Yes. You were asking not so much about the reserves, but the leaching and we have low rate leach columns, and right now, what we're seeing is that we have unloaded the first columns that we loaded, and we have finalized some of those columns. And what we're seeing is that with a coarser crush at around 13 millimeters, we're achieving similar levels of gold extraction as we planned in the engineering phase and design phase with a 6 millimeter crush. And perhaps the explanation there is that the lab work was done with a small HPER crusher and with the much larger HPER that we have in place, probably we're achieving a higher comminution of the rock. But so far the metallurgical response is largely consistent with our expectations or better.
Justin Stevens, Analyst
Yeah. Well, it's good to hear. We were following up on that, I guess. About how much of the material stack do then year-to-date at the end of Q3, would you say you have actively under leach?
Jorge Alberto Ganoza, President and CEO
How much of the placed material is under leach?
Justin Stevens, Analyst
Yeah, just a rough percentage in terms of how much is being actively leached.
Jorge Alberto Ganoza, President and CEO
Everything.
Justin Stevens, Analyst
So just to clarify, your leaching is closely aligned with your stocking?
Jorge Alberto Ganoza, President and CEO
Yes. We began irrigating a couple of months ago. We established a program to irrigate slopes that we had not previously irrigated. Essentially, everything is under irrigation now.
Justin Stevens, Analyst
Got it. And then I guess the last thing then is obviously things are trending for the Lindero. Do you have an idea of when you might expect to declare commercial production there?
Jorge Alberto Ganoza, President and CEO
We have early adoption, but I forget the accounting term. The mine has been operating and consistently achieved design parameters in the third quarter, and it's functioning within those parameters. Since we started production in October of last year, all costs have been calculated accordingly. However, we are not declaring commercial operations yet. This declaration happens when you start capitalizing, achieve production design parameters, and then stop capitalizing to move costs down. We have been doing this since last October.
Justin Stevens, Analyst
Yes. Just to clarify, that doesn't impact what we need to do regarding the Argentinean PESO on the export sale for your doré, correct?
Jorge Alberto Ganoza, President and CEO
No, nothing to worry about.
Justin Stevens, Analyst
Okay. Great. That's it for me. Thanks so much.
Operator, Operator
Thank you. Our next question today is coming from Don DeMarco at National Bank Financial. Your line is live, you may begin.
Don DeMarco, Analyst
Thank you, Operator. Hello, Jorge and team. My first question is for Jorge or perhaps Paul. Yaramoko faced unexpected downtime due to SAG maintenance and changes in the production schedule for the 55 zone. What is the situation and outlook for Q4? Can we anticipate a recovery, possibly with improved throughput in grades?
Jorge Alberto Ganoza, President and CEO
Paul, do you want to go ahead?
Paul Criddle, Chief Operating Officer, West Africa
We experienced an outage due to unplanned maintenance. We addressed this by re-sequencing production, which is primarily dictated by the Yaramoko deposit characteristics. We encountered some challenges in the fourth quarter, but we anticipate a rebound in that period. We plan to make up for the shortfall in the current quarter.
Don DeMarco, Analyst
Okay. Thanks for that, Paul. Shifting to Lindero, I see that in Q3, sustaining CapEx was about $10.6 million. Do you expect to spend a similar amount in Q4, or should we model this to start easing?
Jorge Alberto Ganoza, President and CEO
Cesar?
Cesar Velasco, Chief Operating Officer, LATAM
Okay, I had a problem with the audio. Can you please repeat your question?
Don DeMarco, Analyst
Yes. Sure, Cesar. I was just asking about the Lindero sustaining CapEx. Should we continue the run rate of about $11 million that we saw in Q3, or should we model something lower than that?
Cesar Velasco, Chief Operating Officer, LATAM
It should be in line with that, so you should be modeling the same as we had some delays in the ADR expansion plant scheduled to be commissioned in Q4, so you should be modeling the same number.
Don DeMarco, Analyst
Okay. Great. And then finally, Jorge, on the situation at San Jose, now, what I hear from your comments, I understand there are two issues that SEMARNAT has put forward. They have alleged that they haven't received requests and then they're pointing to some ancillary infrastructure, 73 works. You're going through the proceedings providing proof and whatnot and defending your position. Just building on a previous caller's question, what should we look to next? I understand the timing may be uncertain and may take days for the courts to review what you've submitted. Well, should we look for a press release in a week, maybe, or how will you keep the markets updated on this as new information becomes available?
Jorge Alberto Ganoza, President and CEO
Yes. And I want to go back to something I said. No, we have not shut down dialogue with SEMARNAT. We're still trying to solve this administratively, which is having SEMARNAT reassess their position based on the fact that we have presented proof that we are in compliance with the issues they raised in the denial or cited in the denial. There are meetings scheduled with high-ranking SEMARNAT officials, and there is dialogue ongoing. We have a degree of expectation that something positive can come out of that dialogue. We have to recognize that the Mexican government has made significant budget cuts across all government offices and SEMARNAT is sometimes shorthanded to deal with the complexities of their business. Unfortunately, that's a reality. Because there are some things here that we just fail to understand how someone is not doing their work there. If they cannot identify themselves, we have submitted on at least three occasions dating back to 2019 the document they're requesting for. So dialogue continues, and through dialogue, perhaps we can have a breakthrough with them sooner than later. But we also have to continue advancing with our measures in court. This is something similar to what we did two years ago when we had an issue with their royalty claim. As you all might recall, the Mexican government issued a cancellation procedure on one of our main claims during a royalty dispute. Eventually, we were able to solve this. It has been a protracted process, but there is an administrative path of dialogue with the government and then the legal path in the court. We're pursuing both. And I believe that, as I explained to a previous caller as well, some of these legal measures, which we are taking now that we have more information, we are feeding the courts this additional information that we believe strengthens our position in court should lead to responses from the court and that can be measured in days.
Don DeMarco, Analyst
You are pursuing this in two ways. The court path could lead to a permanent injunction, while the administrative path may result in an extension of the permit. My last question is regarding that permit; is the preferred outcome an extension? How often is this permit renewed? Is it annually or every couple of years? SEMARNAT presumably would have granted it. When was the last time SEMARNAT renewed it?
Jorge Alberto Ganoza, President and CEO
No. This permit was granted for a 12-year period back in 2009 when we received our environmental impact statements. When we built the mine, it had reserves and resources for a 5-year life. Therefore, we requested a 12-year environmental permit. I am not certain if that is the maximum that can be requested; I would need to consult with counsel. However, we did request almost double the loan we had back in 2009. The years have passed, exploration has been successful, and we knew our application was for a 10-year renewal. Again, I will need to verify if that is the maximum you can apply for.
Don DeMarco, Analyst
Okay. Thanks, Jorge. Good luck pursuing both paths. Thank you.
Jorge Alberto Ganoza, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question today is coming from Adrian Day at Adrian Day Asset Management. Your line is live. You may begin.
Adrian Day, Analyst
Thank you, Jorge. I apologize for bringing up Mexico again. I have a few questions that I would like to ask all at once, if that's alright. First, regarding the royalty settlement, could you clarify if this is settling what they claim you owed in the past or if it finalizes the arrangement so there won't be any future royalties? My other questions are related to SEMARNAT. Did SEMARNAT reach out to you at all before their decision stating they are still seeking information? Also, has the local government played any role in this situation? Are they interested in supporting the mine and the workers? Finally, I've heard from multiple companies that the decisions from SEMARNAT seem illogical and unprecedented, which leads me to wonder if there might be some underlying motive at SEMARNAT to delay mining operations in Mexico. Those are my questions.
Jorge Alberto Ganoza, President and CEO
Thank you, Adrian. With respect to the royalty question, my way of background, the Mexican Geological Survey claimed that we owed an amount of $30 million plus for unpaid royalties on a concession. We disputed the legality of that claimed royalty and we went to court. But just like now, we went to court to have a court decide if the royalty was legal or not and at the same time, we continued trying to broker dialogue with the Mexican Geological Survey and the Secretary of Mines and the Secretary of Economics. Eventually, we did. What we have achieved is an arrangement by which we are paying $9.6 million. And with that, we settled any past claim they have on old amounts. Again, they were claiming that the old amounts were plus $30 million. And we have agreed to a 3% royalty moving forward. And so with that, there is no royalty dispute, and there is no claim, and we are actually removing from title the old royalty that was registered in historic title, which gave rise to their claim. We are replacing that with the new agreement of a 3% royalty moving forward. So that closes the issue. And I have to say that through the process, we have gained a lot of goodwill with the Secretary of Economics and the sub-secretary of mine, and the Mexican jurisdiction. Moving to your question number 2, the SEMARNAT process. The answer is no. Through the process on the extension of the permit that we initiated in May of this year, they had one request for information shortly after we initiated the process where they requested three or four items of additional information, and those were very immaterial. They were asking who the contact person was in the file and other three minor issues of that nature. Since then, we never heard back. We requested meetings and never got a reply. They were quite non-responsive to our requests, and based on the fact that they became non-responsive to us, is that we decided to initiate legal actions ahead of the October 23rd date because we didn't know what was happening. In two occasions, we managed to speak with our low-level official and their reply to us would be that this is being managed at a higher level and that there are a lot of delayed files. Based on those uncertainties, we placed ourselves in multiple scenarios, and we decided to initiate preemptively some legal actions. Number 3 is local involvement. I have to say that we have had remarkable support from local authorities. And when I speak about local authorities, first the governor of the State of Oaxaca, Alejandro Murat. I think we could not have asked for more support from the governor of the state. He has been behind us trying to help broker dialogue and he's still playing a pivotal role in our effort to broker dialogue and has been quite supportive. More in the town of San Jose, the mayor of the town has also and his entire team have played a key role in supporting, and they have sent letters to their representatives in Congress, they have gone to Mexico City and spoken with representatives of Congress and Senate, and they are certainly very active in support of the Company. Lastly, with respect to the attitude of SEMARNAT, it is no secret that President Lopez Obrador is not fond of mining, particularly Canadian mining, that is no secret. Now, the chief has also said that operating mines will continue to operate and he will be supportive of that. That's something that he is on record saying. But at the same time, he has placed a moratorium on new mining claims in the country. You cannot apply for new mining concessions in Mexico too. I think there is a compounded effect of the budget cuts in different government offices like SEMARNAT, the fact that everything slowed down through the pandemic, and certainly an issue with the attitude towards mining that permeates. I believe that is compounded. But I have to say that they are also quite sensitive to the risk of loss of jobs. I have to say that throughout the Mexican government, they are also very sensitive to that.
Adrian Day, Analyst
Okay. Okay. Thank you. And I'm sorry, Jorge, just quickly. Are SEMARNAT decisions made at the local level, regional level, or are they made at the national level?
Jorge Alberto Ganoza, President and CEO
SEMARNAT is a federal office, meaning it operates at the national level. While SEMARNAT has local offices, they are under the central government and not independently governed. All decisions are centralized.
Adrian Day, Analyst
Okay. Great. Thank you. Thank you. Thank you very much.
Operator, Operator
Thank you. Our next question today is coming from Michael Anthony, a Private Investor. Your line is live, you may begin.
Michael Anthony, Private Investor
Yes. I didn't catch it earlier. When did you say you'll get the permit without?
Jorge Alberto Ganoza, President and CEO
We have not provided a date for when we believe we can get the permit because we just don't know that. What we have described are all the actions that we are taking in hopes that we can get a permit and the legal measures we're taking to protect ourselves in case this is a protracted process, right?
Michael Anthony, Private Investor
Right. But you had like 1200 people working there at that mine?
Jorge Alberto Ganoza, President and CEO
We employ directly around 1,200 people. But in addition to that, there is an entire world of service providers, including local contractors, higher shops for contractor trucks, and you name it. Our community support agreement at San Jose Progresso amounts to about a million dollars a year that's invested in infrastructure, sustainable development, education, and health. This year, we have provided about 160 scholarships in the town. We support many initiatives for tomato growers, support irrigation programs, and all of that through these structured community agreements that every year is in the amount of roughly about a million dollars. So all of that investment, plus the direct employment and indirect employment, has a huge impact on an area that's not industrialized. As you know, mines are located in remote areas and this mine is not particularly remote, but there are no other decent job opportunities available in the valley where we're located. These towns have a large female population because most of the males migrate to the U.S. for work. And what you are left with are single mothers and broken families because of their migration. So I believe that SEMARNAT, as they get more knowledgeable about this particular case, will also become sensible to this issue.
Michael Anthony, Private Investor
Right, and again, the Mexican government, they cannot afford to hurt our people like this so they've got to be going to issue a permit by their own in the future that I gather because it's just too many people out of work. The government.
Jorge Alberto Ganoza, President and CEO
Yeah, and also very important to note is that we have never been cited for environmental pollution or anything like that. The only thing they're citing is, wrongly we believe, the paperwork.
Michael Anthony, Private Investor
I have been a shareholder for over six to nine months, and I believe you are very undervalued. I am confident that everything will be resolved because I trust in your capabilities. In fact, I called you and I hope you can return my call later this afternoon or tomorrow.
Jorge Alberto Ganoza, President and CEO
We will. Thank you very much.
Michael Anthony, Private Investor
Thank you and good luck. I know you’re going to get things taken care of because I know you're good.
Carlos Baca, Director of Investor Relations
Thank you, sir.
Operator, Operator
Thank you. Our next question is a follow-up from Dalton Baretto. Your line is live, you may begin.
Dalton Baretto, Analyst
Thanks for the follow-up. Jorge, I have a simpler question, and maybe this one's for Paul. You've just started building Seguela. I've heard from many of your peers that there is significant inflation in steel, consumables, and labor. Additionally, there appears to be congestion in the port of Abidjan. I'm curious about your recent $32 million increase in the CapEx budget. How much of that was set aside for contingencies, and are you experiencing any delays in bringing in materials? Thank you.
Jorge Alberto Ganoza, President and CEO
That's a very good question and something we have addressed with the team and I will let Paul provide all the details here.
Paul Criddle, Chief Operating Officer, West Africa
Thanks, Dalton. The current critical path for the Seguela project is closely monitored. 61% of the approximately $170 million capital budget is fixed costs. With that, that comes at a premium to do that with the various contracting. The ability to improve the project in the third quarter and actually execute those agreements and allow those contractors to make the procurement decisions to make their schedules using earlier commitments is crucial. At the moment, all of the schedules and costs that you see in the current budget incorporate the realities that we are seeing in the world. So as we sit today, I don't have any major schedule concerns, but yes, we’ve increased our allowances in the budget for the current levels of congestion in Abidjan. We're closely monitoring that, but we have contemplated the current delay in application. We are moving equipment and people in and around West Africa. We continue to operate the Abidjan margin now and became efficient. All of the equipment that is required to operate that project comes through Abidjan. So I feel we have a reasonable handle on that, but this is not the side we're not focused on going forward.
Dalton Baretto, Analyst
That's great, thank you for that.
Paul Criddle, Chief Operating Officer, West Africa
Thanks, Dalton.
Operator, Operator
Thank you. Our next question today is coming from Jack Bortman at Laurentian Bank Securities. Your line is live, you may begin.
Jack Bortman, Analyst
Thanks very much. Jorge, just so I'm clear, did you indicate earlier in the Q&A that Lindero is now at design capacity? How would you characterize the current wrap-up stage given the COVID-related issues with travel restrictions? I'm just trying to get a sense of where things sit because I thought from an ore to the stock to the leach pad you were still behind, and there were still some things to iron out. Go ahead.
Jorge Alberto Ganoza, President and CEO
Yes, in the third quarter, starting around mid-third quarter, we have been achieving a rate of production within 80% of design parameters. So, we have made progress in getting the entire train operating together as a whole, but it's still a process to get to 100%. We are addressing some bottlenecks and expect for improvements going forward. So I think we're comfortable now seeing the operation steady at rates that are at or above 80% of design.
Jack Bortman, Analyst
In July, when you provided your updated guidance, you mentioned that you anticipated reaching design capacity early in Q4, but that hasn't happened due to travel restrictions. When do you think you'll reach design capacity, beyond just 80%? Is it a quarter away, or two quarters? I understand if you want to wait for more information until you have the necessary personnel on the ground to assist with the entire operation, but I would appreciate your best estimate at this time.
Jorge Alberto Ganoza, President and CEO
We provided revised guidance, and that revised guidance continues to project production rates that increase slowly but steadily. We still have some minor adjustments to the system in Q4, and changes that generates scheduled downtime. But the system is operating steadily at or very close to design parameters in the interim.
Jack Bortman, Analyst
There was a little bit rough. Are you saying you believe you'll be at 100% design capacity by the end of Q2? Is that what I heard?
Cesar Velasco, Chief Operating Officer, LATAM
Well, we do have to process the materials, and we expect to have the processes ready and available at 100% capacity. Although, obviously, we operate at lower capacity on a permanent basis. But we should be able to de-bottleneck those issues by Q2.
Jack Bortman, Analyst
Jorge, if you could just confirm as you heard better than I did. I'll let it go, but am I hearing Q2?
Jorge Alberto Ganoza, President and CEO
Yes, we have some work to do to remove some bottlenecks. For example, we are making changes to the liners in agglomeration drums and whatnot, that will require some downtime and all of those works are going to be done by the end of Q1.
Jack Bortman, Analyst
Okay. Thank you very much.
Jorge Alberto Ganoza, President and CEO
Thank you.
Operator, Operator
Thank you. Our next question today is coming from Trevor Turnbull at Scotiabank. Your line is live, you may begin.
Trevor Turnbull, Analyst
Hi, Jorge, and I apologize. This might have been touched on before, but just a really simple question going back to the royalty. Was this royalty now going to cover the entire San Jose property, or is it still limited to the Progreso concession which is where this all started?
Jorge Alberto Ganoza, President and CEO
Progreso alone, Trevor.
Trevor Turnbull, Analyst
So if that's the case, Progreso only represents about 25% of the production. How much will Progreso and this new royalty impact moving forward?
Jorge Alberto Ganoza, President and CEO
I don't have the breakdown of resources and reserves on the Progreso concession in my head right now, but it is a meaningful amount, not 25% or 30%. Bear in mind that all of those concessions belong to the Mexican Geological Survey, and a lot of those where we've been producing since day one do carry royalty commitments. But this one, through this dispute is that we have paid $9.6 million to settle any historic claim that we have agreed voluntarily to pay on an ongoing basis a 3% royalty. I would have to double-check and Carlos can provide that to you in a follow-up on the exact amount of reserve resources that are subject to that 3% moving forward; I don't have the number in my head right now.
Trevor Turnbull, Analyst
No, that's fine. Yeah. Carlos can confirm that through that would be great. Thank you very much, Jorge.
Jorge Alberto Ganoza, President and CEO
Don, thank you too.
Operator, Operator
Thank you. Once again, ladies and gentlemen, the floor is open for questions. Our next question today is coming from Eric McPherson, a Private Investor. Your line is live; you may begin.
Eric McPherson, Private Investor
Hello, gentlemen. I thought the results were generally good. The main concern is the San Jose property. A couple of weeks ago, you mentioned it earlier in the call, but I wanted to get your perspective again. Do you believe that the actions from SEMARNAT are a personal agenda or just related to the infrastructure that you seem reluctant to address? I'm not sure if there was clarity on that. I have three questions; that’s just one of them. The second one is about the current market cap and stock, which have dropped significantly today, around 20%, resulting in a substantial market capital loss of $350 million. However, San Jose reportedly brings in about $132 million based on your numbers. What do you think about the overselling? Additionally, with such a price decline, is there consideration of a stock buyback program to help support the company and regain momentum, as the market cap impact is notable? Thank you.
Jorge Alberto Ganoza, President and CEO
Thank you for your questions. Regarding your first one, I don't believe this is a targeted action or attack on the Company. We do acknowledge that Southern Mexico is less industrialized compared to the northern states, which host the majority of the country's mines, such as in Durango, Pachuca, Zacatecas, and Sonora. In Oaxaca, for instance, there are only two operational mines, one cement plant, and a beer bottling factory, with minimal other industrial activity. Whether this situation contributes to us receiving more attention, I can only speculate. We are aware that many companies have their environmental files stuck in that office, which is concerning. We find it surprising how little care has been taken in citing arguments related to permit extensions. Regarding the issue of overselling, we take market activity very seriously. I am closely supporting our team in Mexico, and this is something of great importance to us. Currently, the San Jose mine makes up about 25%-28% of our consolidated sales, which underscores its significance, though it is just one part of our overall operations. We are hopeful about resolving these issues and are currently in dialogue with the authorities and addressing legal actions. As for a stock buyback, multiple factors influence this decision, including valuation, the use of funds, and short- to medium-term capital commitments. In evaluating a share buyback, we consider all these aspects rather than simply acting on perceived undervaluation. We have around $170 million in capital commitments for the Seguela project, which we view as crucial. Once operational, Seguela is expected to produce 130,000 ounces of gold annually with all-in sustaining costs below $1000 and an internal rate of return in the high 30s to low 40s percent based on spot prices. It is a straightforward project, and we have the right team in place to develop it. Therefore, all these elements will factor into our decision regarding a stock buyback.
Eric McPherson, Private Investor
Correct. I appreciate that, Jorge. I just want to mention that mine is still active, and it seems like the market is treating you as if there is no production at San Jose, and even then, it's only at 25%. This represents a $350 million market cap loss in just 24 hours. That was my concern at that time.
Jorge Alberto Ganoza, President and CEO
I think personally, I might be in the market now that the blackout is over. I am considering buying yes, weighing all those factors.
Eric McPherson, Private Investor
I appreciate.
Jorge Alberto Ganoza, President and CEO
Weighing all those factors. Thank you very much.
Operator, Operator
Thank you. Our next question is a follow-up from Ron Jager, a private investor. Your line is live.
Ron Jager, Private Investor
Thank you, Operator. Thank you so much for the answers today. I've got a question on the bank and the bank covenant. I would like to know which banks are involved with you, how much money are we talking about, and is the problem with the bank more serious than a doiling by the authorities? Thank you.
Jorge Alberto Ganoza, President and CEO
Luis, you want to help here?
Luis Dario Ganoza, Chief Financial Officer
Yes. So the lenders we've been dealing with comprise syndicates that include BNP, Bank of Nova Scotia, and the Bank of Montreal. Upon closing of a new facility, the total amount of outstanding debt has been restricted to $120 million. That has been the amount drawn on the new facility. As we disclosed in the news release, the outstanding prior assumed debt from the transaction with Roxgold of $28 million was paid out. After the closing, the total senior secured debt outstanding is $120 million. And as we will also disclose, the additional $80 million of committed amount under the facility will become available once this issue is resolved. In terms of the November 20th date, again, we touched on this earlier in the call, but they really had to do originally with the expected time that a legal process would roll from our provisional injunction to a definitive injunction. Now things are evolving not necessarily in the same way that was planned for unexpectedly, so hence our expectation that we'll work with the banks to gain additional flexibility around that date.
Ron Jager, Private Investor
Okay. Thank you.
Operator, Operator
We have no further questions in queue at this time. I will now turn the floor back over to management for any closing remarks.
Carlos Baca, Director of Investor Relations
If there are no further questions, I would like to thank everyone for listening to today's earnings call. We wish you a great end of the year.
Operator, Operator
Thank you, ladies and gentlemen, this does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.